Many savers are looking to stocks and shares ISAs to boost their returns as savings rates plummet to some of the worst rates seen in history. The average five-year fixed rate bond has seen a rate cut of 0.61% since the start of the year and this declining trend looks set to continue. While inflation at 0.5% is at its lowest rate for four years, many savings accounts still fail to generate a real cash return today. Given the greatest downward pressure on inflation was the fall in prices of fuel and recreational goods as a result of the Coronavirus lockdown, this figure could be set to rise as the economy starts to open up. The current top five-year fixed rate bond is from Bank of London and The Middle East (BLME), offering a 1.60% expected profit rate; with inflation having been at 1.8% in January of this year, this could in the future fail to deliver savers a return in real cash terms.
This scenario of low savings rates and the risk of locking into accounts that could fail to beat inflation in the medium-term makes the risk of loss of capital that exists with a stocks and shares ISA one that more savers might be prepared to take in exchange for better returns.
Those who are starting out in investments will most likely find stocks and shares ISAs to be their first port of call. They are easily accessible through fund managers and the funds can be completely managed on behalf of the investor.
Any saver looking to invest in stocks and shares ISAs needs to be prepared that the value of their investment will rise and fall over time, even without extreme market shocks such as the Coronavirus pandemic. The average stocks and shares ISA fund in the UK fell by 13% in the 2019/20 tax year, however this has increased by 15.57% in the new tax year, as markets anticipate a gradual easing of lockdown measures. It’s also important investors are aware that different funds will achieve different levels of growth. Since the start of the new tax year, stocks and share ISA funds have seen the percentage of growth range from a contraction of 0.98% to a positive increase of 31.9%.
Volatility is part of this type of investment and therefore any decision to save into these must form part of a portfolio of savings that combine capital protected funds, easy access accounts and longer-term investments. Investors need to be able to accept the potential of a loss and be prepared to save for the medium to long-term to potentially realise a return.
A stocks and shares ISA also offers the benefit for a tax-free wrapper, which means any profits earned will not incur tax. The maximum investment into a stocks and shares ISA in any single year is £20,000 and many will accept transfers-in from cash ISAs or other stocks and shares ISAs.
There is a range of different types of organisations offering stocks and shares ISAs. Investors may prefer to invest ethically through a mutual organisation such as Foresters Friendly Society or seek an investment platform that has a wide range of funds available such as AJ Bell or Interactive Investor.
For those with larger lump sums to invest, then diversification of the investment becomes more important. This means looking for an investment platform that allows many different funds from many different fund providers. A greater choice of funds allows investors to spread their investment across a range of different asset types and across different geographies, thereby spreading their risk.
Some investment platforms may restrict investors to a handful of funds, while going direct to a provider may limit investors to only the provider’s funds. In this case, it is important that the investor can balance their acceptable level of risk to the funds available.
Investors can compare stocks and shares ISAs in our chart, which includes over 83 providers, all with a range of different investment funds. Alternatively, investors can speak to an independent financial adviser first to advise the best options.
Being able to transfer from a cash ISA into a stocks and shares ISA is widely available. The process is the same as transferring between cash ISAs and investors will need to open the new stocks and shares ISA first and then request a transfer form from them. The new ISA provider will then arrange the transfer. Most stocks and shares ISA providers will accept transfers-in from other stocks and shares ISAs and some will even cover any exit fees incurred as a result of the transfer.
You can pay into both a cash ISA and a stocks and shares ISA in the same year if the total saved in both does not exceed £20,000.
Savers that are prepared for a long-term investment of 10 years or more and appreciate the volatility of stocks and shares ISAs can start investing from as little as £25 per month. A regular deposit means that even when the value of the stock market reduces, at that point you are buying stock at a lower unit rate and over time this means the value you have obtained for every £1 averages down.
A £25 monthly investment into a stocks and shares ISA over 25 years at an average annual rate of return of 5.14% (the average return for April 1999 to April 2020) would generate a total savings pot of £11,951. The equivalent saved into an easy access account using the average rate* for the same period would achieve £7,748.25. However, savers should be aware that past performance is not an indication of future returns.
Savers using an investment platform should be aware that they will likely be charged management fees, such as trading fees and monthly costs, on their investments. These fees can particularly impact the profits made on investments for those with a modest portfolio, for example up to £5,000. In addition to this, investors will also be charged exit fees when they look to withdraw funds or transfer their investments. These fees are charged to cover the cost of processing the withdrawal or transfer, however some platforms can inflate costs and, in some cases, charge £25 per fund or stock to be transferred. Those looking to transfer their portfolio to a different platform may also have to pay additional costs, as well as having to deal with a process that at times can take up to a month to complete
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